Reproduced with permission from BNAI European TaxService Monthly Digest, 19 ETS 10, 1/31/17. Copyright �2017 by The Bureau of National Affairs, Inc.(800-372-1033) http://www.bna.com

JANUARY 2017

No PermanentEstablishment forForeign PrivateEquity Funds inDenmarkLærke Hesselholt and Karsten GianelliGrant Thornton Denmark

For some time it has been unclear whether foreign investors inDanish transparent entities were subject to Danish incometaxation of their share of the income in the entity. However, theDanish tax authorities have now eliminated this uncertainty andhave defined the conditions for establishing investment structuresvia Danish transparent entities in which foreign investors are notsubject to any Danish taxation.

I. Introduction

Tax transparent Danish corporate entities have

for years been regarded as suitable for private

equity funds in which all investors are foreign

(i.e. not Danish) and the investments of the fund are

made outside Denmark.

The advantages of these structures are:

s On one hand, to establish a separate entity with fulllegal capacity to enter into agreements and otherobligations and governed by Danish law, which isquite uncomplicated and operational in compari-son to many other jurisdictions.

s On the other hand, to ensure that theinvestments—as a result of the tax transparency—are not taxed separately at the Danish entity, butonly on the level of the investors.

Thus, the use of a transparent Danish entity in these

structures will only be relevant if it does not result in

Danish taxation of the investors. One of the main con-

siderations is, therefore, to ensure that the foreign in-

vestors does not establish a permanent establishment

in Denmark for income tax purposes.

The Danish Tax Assessment Council (Skatterdet)

has, in three recent decisions, set out the conditions

for that.

II. Tax Transparent Entities

Corporate entities in which all shareholders have lim-ited liability are for Danish tax purposes regarded asseparate entities subject to corporate income taxationin Denmark.

However, corporate entities in which one, some or

all shareholders have unlimited liability with regard

Lærke Hesselholtis Tax Director andKarsten Gianelli isSenior Tax Man-ager at GrantThornton Denmark

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to the obligations of the corporate entity are for

Danish tax purposes not regarded as separate entities

but as tax transparent entities. Thus, these entities are

not taxed separately but the profit/loss of the entity

will be —as a result of the transparency—be taxed di-

rectly at the level of the shareholders. Distributions

from the transparent entity to the shareholders is,

consequently, not regarded as a distribution of divi-

dends for Danish tax purposes and will, therefore, not

be subject to any Danish withholding tax.

The tax transparent entities include the following:

s The unlimited partnership (Interessentskab or I/S)in which all partners have unlimited liability for thepartnership’s obligations. The unlimited partner-ships are not subject to the Danish corporate legis-lation, but primarily based on common law.

s The limited partnership (kommanditselskab or K/S),normally with one unlimited liability partner(komplementaren) and a number of limited liabilitypartners (kommanditister). The limited partner-ships are not subject to the Danish corporate legis-lation, but primarily based on common law. Theunlimited liability partner will often be a Danishcorporation set up for this particular purpose andoften owned by the limited partners. The unlimitedliability partner does not need to own a share of thelimited partnership.

s The partner company (partnerselskab or P/S) whichis similar to a limited partnership with at least onunlimited liability partner and a number of limitedliability partners, but subject to most of the Danishcorporate legislation pursuant to the Danish Com-panies Act.

The entity normally used for foreign private equity

funds is the limited partnership.

III. Requalification of Transparent Entities

However, the tax transparent entities will—in somecases—be requalified as non-transparent, i.e. as sepa-rate entities for Danish tax purposes, pursuant to Sec-tion 2 C of the Corporate Tax Act.

The requalification will apply to all Danish transpar-

ent entities defined as:

s entities legally registered in Denmark, i.e. regis-tered at the Danish Corporate Authorities;

s entities seated in Denmark pursuant to the Articlesof Association; or

s entities having their seat of effective managementin Denmark.

The requalification on a Danish transparent entity

will apply if direct owners, i.e. shareholders, owning

more than 50 percent of the capital or controlling

more than 50 percent of the votes in the entity are resi-

dent in another tax jurisdiction:

(i) in which the transparent entity is regarded as a

separate entity for tax purposes. e.g. pursuant to

the U.S. check-the-box rules; or

(ii) which is not a member of the EU and does not

have a tax treaty covering dividends with Den-

mark. This includes shareholders in typical tax

haven jurisdictions.

The main effects of the requalification is that the

entity will be subject to Danish corporate tax at the

rate of 22 percent as other Danish companies, and

that distributions from the entity to its shareholders

will be regarded as distribution of dividends subject to

Danish withholding tax at the rate of 27 percent.

IV. Transparent Entities and PermanentEstablishment

The effect of the transparency is—as mentionedabove—that the profit/loss of the transparent entity isnot taxed at the level of the entity but at the level of theinvestors. Thus, the income of the transparent entitywill, for income tax purposes, will allocated amongthe shareholders and taxed directly at the level of theshareholders.

This transparency and taxation at the level of the

shareholders will apply regardless whether the share-

holders are Danish or foreign and regardless whether

the shareholders are corporate entities or individuals.

Thus, shareholders not resident in Denmark and,

thereby, not subject to unlimited tax liability in Den-

mark, will only be subject to Danish income taxation

if this income is subject to limited tax liability in Den-

mark, i.e. is derived from a permanent establishment

in Denmark. Thus, the income from the transparent

entity will only be taxable in Denmark for the foreign

investors if the transparent entity in itself constitutes

a permanent establish for Danish tax purposes.

Under Danish tax law the term ‘‘permanent estab-

lishment’’ is interpreted in accordance with Article 5

in the OECD Model Tax Treaty.

Pursuant to Article 5(1) the term ‘‘permanent estab-

lishment’’ means a fixed place of business through

which the business of an enterprise is wholly or partly

carried on. Thus, the transparent entity will constitute

a permanent establishment for its foreign sharehold-

ers if it conducts business activities from a fixed place,

i.e. an office etc., in Denmark.

Further, pursuant to Article 5(5) activities via an

agent acting on behalf of the principal will constitute

a permanent establishment for the principal, pro-

vided, however, only if the agent is dependent of and

subject to instructions from the principal. Thus, the

transparent entity—and its foreign shareholders—will

have a permanent establishment in Denmark if a

Danish resident dependent agent subject to instruc-

tions from the transparent entity/the shareholders

carry out business activities on behalf of the transpar-

ent entity.

V. Recent Case Law

The Tax Assessment Council have recently issuedthree binding rulings (SKM2017.12, SKM2017.13 andSKM2017.14) which give quite precise guidelines with

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regard to whether foreign investors in a Danish trans-parent entity are regarded as having a permanent es-tablishment for tax purposes in Denmark.

The facts of all three cases were more or less similar

and involved the following parties/entities:

s A private equity fund structured as a Danish limitedpartnership (K/S) with a number of limited part-ners, Danish as well as foreign. The limited partner-ship would:— be making equity investments in Danish and for-

eign corporations and, in one of the cases, in-vestments in greentech projects outsideDenmark;

— not have any office premises or any employees;— be a passive investment fund for which all in-

vestment decisions were made by the manage-ment of the unlimited partner, cf. below, andadministered by the management company, cf.below.

s An unlimited partner in the Danish limited partner-ships. The unlimited partner were in two of thecases Danish foundations established by Danish themanagement company and in the third case aDanish corporation owned by the limited partners.The unlimited partner would:— not have any office premises or other employ-

ees;— be managed by the Board of Directors or a

number of managing directors; and the man-agement of the unlimited partner would:o be financially and legally independent of the

limited partners as well as of the managementcompany;

o make all investment decisions for the limitedpartnership;

o not be subject to any instructions in thisregard from the limited partnership, the lim-ited partners or the management companyapart from the general investments strategydetermined at the establishment of the lim-ited partnership.

s The management company, which was a Danishcompany with Danish office premises and anumber of Danish employees. The managementcompany would:— provide administrative and investment advisory

services to the limited partnership, however, allthe management of the unlimited partner wouldmake all investment decisions for the limitedpartnership;

— provide these kind of services to a number ofother investments funds;

— not be subject to any instructions from the lim-ited partnership or the limited partners.

Based on these facts the Tax Assessment Council

found in all three cases that the Danish limited part-

nership did not have a permanent establishment for

tax purposes in Denmark. Thus, foreign limited part-

ners in the limited partnership did not have a perma-

nent establishment in Denmark and would,

consequently, not be subject to any Danish income

taxation of their share of the profits in the limited

partnership.

However, the decisions were, in all three cases,

based on the following assumptions:

s That Danish investors or investors resident in juris-dictions with a tax treaty with Denmark coveringdividends and not treating the limited partnershipas a separate entity would own more than 50 per-cent of the limited partnership. Thus, that theDanish limited partnership was not requalified as aseparate entity pursuant to section 2C of the Corpo-rate Tax Act, cf. above.

s That none of the foreign investors conducts otherbusiness activities in Denmark.

Further, the independence of the actual manage-

ment, i.e. of the transparent entity is a decisive factor.

Thus, the Tax Assessment Council have in a decision

from 2013 (SKM2013.899) stated that a Danish lim-

ited partnership—and thereby its foreign limited

partners—did have a permanent establishment in

Denmark. The main reason for this decision was the

fact that the majority of the members of the manage-

ment of the unlimited partner, which was making the

investment decisions for the partnership, also were

partners in the Danish management company. Thus,

the limited partnership was regarded as having a per-

manent establishment at the premises of the Danish

management company.

VI. Conclusion

The recent rulings from the Tax Assessment Councilhas confirmed that the use of Danish transparent enti-ties in private equity funds structures is possible anddoes not result in any Danish taxation of any foreigninvestors.

However, this will only be the case if the Danish

transparent entity does not set up a permanent estab-

lishment in Denmark. A crucial element in this regard

is to ensure that the investments decisions are not

made by a Danish managing company or by the inves-

tors, but by individuals who are financially and legally

independent of the foreign investors as well as of a

Danish managing company.

Further, it must be noted that the structure will only

work if a majority of the investors are either Danish or

resident in jurisdictions with a tax treaty covering

dividends with Denmark.

Thus, the advice from Danish tax experts is recom-

mended if the use of Danish transparent entities is

considered.

Lærke Hesselholt is Tax Director and Karsten Gianelli is SeniorTax Manager at Grant Thornton Denmark

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